42 and wondering if I can get there from here
Hi, I'm 42 years old and wanted some advice to see if I can actually achieve some sort of early retirement. I would say I am on the modest retirement at 65 path right now. I'd like to be on the modest retirement at 55 path if possible.
I've got a hodgepodge of things working in my favor and against me.
- I'm cheap, my wife is semi-frugal.
- We have low expectations for retirement (we currently live on about $800/mo for casual travel, food & entertainment - I could cut that in half, not sure she could)
- I have an ok paying job ($52k after deductions)
- I do everything myself (home repair, car repair, gardening, etc.)
- only debt is student loans and mortgage debt
- access to 457k account (for early retirement)
- no kids, no plan to have kids
- small collection of appreciating valuable cars with indoor storage ($60k unrestored, $200k when I finish restoring them)
- no replacement cars on the horizon
In the middle (unsure if these are good):
- rapidly appreciating property values (about $13k/year) (feels bubbly)
- 1 mortgaged rental property ($90k loan at 2.875%; $265k assessed value, $1400/mo rent = $200/mo. net income, pretax - 11 years left on loan and part of my planned retirement income)
- 1 fixer upper primary residence ($340k mortgage, $420k current assessed value + sweat equity - not sure we will live here forever - $500k+ when property is finished)
- 401k loan of $50k ($48k remain at 3.25% to myself) to make the second property fall in place - I understand the tax implications with unpaid balance at early retirement.
- wife is back in school for next 3 years which limits our second income, but goal of tripling her current part-time pre-tax SE income of $25k (at cost of $100k debt) and part of our retirement plan is that I quit and she keeps working for a decade (she's 8 years younger than me).
- I'm very tolerant of moderate financial risk - not gonna do anything too crazy, but I don't have very much to loose, and not very much dependent on me.
- time - I feel behind the ball with limited room for additional investing.
- I have $165k - $48k loan in a 401k (100% index funds, 66% US, 34% international, 0% real estate)
- modest $12k in a 457k ($100/paycheck)
- pets -lots of pets ($400/mo)
- wife's retirement goals and my goals are divergent - I want to FIRE, she wants to work forever - we both agree that we can both do what's necessary to achieve our personal retirement goals
- after modest monthly expenses, we have about $400/month, which I mostly spend on sweat equity/fixer upper home.
- no emergency fund except credit cards and liquidate assets to recover.
It's hard to find much wiggle room to invest more money - my goal is to max pretax in the 457, but that may take 2-3 years (dependent on wife's annual income). I could consider liquidating assets (vehicles and one of our properties) to invest more in my 457k, start a pretax account for wife, or pay down mortgages.
I am holding out for wife to graduate and find higher paying job and then to start dumping money into mortgages, student debt and maxing pretax investments for about 10 years. I would like to have $400k in 401k and at least $200k in 457 account before semi-retiring in my 50s. I plan to take SS at 65 and the internet says I will live into my 90s.
All of that to lead to the simple question - Is my plan smart? Can I do something differently or a lot better right now? Can I plan to do something better when we have a decade of true double income?
Spousal agreement - You and your spouse need to agree on spending and the retirement plan.
LBYM - It appears you both overspend. I would suggest you develop a budget that will allow for paying down debt and saving.
Car collection - The car collection is not an investment. It is a hobby (an expensive hobby)
401k loan - Red flag. What was this money used for? Pay off the loan asap.
Rental property - the house value to monthly rent is out of balance. Sell the rental, pay off debt and invest the remainder.
Primary residence - Based on your income, it appears you have to much house. Do not count your house as an investment.
Lifestyle vs. Investing - Don't mix your lifestyle choices with your investing. The cars and the home remodel are both lifestyle choices and probably poor investments.
Study investing and LBYM - This link to The Bogleheads Book List will provide information on investing. For LBYM recommendations, Try the Millionaire Next Door and The Total Money Makeover. Also, there are numerous websites, including this one, that focus on LBYM.
You referenced $100,000 in student debt by the time your DW is finished. Is that accurate? What is the plan for paying that down? It does seem as though you have a whole lot of debt.
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First, you and your wife need to be on the same page or nothing else matters. Second, I'd sell the rental property and a couple of the cars, at least. Let yourself have some fun with your favorite of the cars. If you can restore and sell that one, then maybe get another you can spend time on and sell.
Agree that you have too much house, even as a fixer-upper. Finish fixing, and look to downsize. Based on your income and the value of that home, you have a lot of your savings tied up there.
On your current path, your wife's plan of working forever may be reality, but you're young and have plenty of time to get that corrected. I think you need to shake some of your available assets loose from homes/rentals/cars. But first and foremost, you and your wife need to be on the same page.
401k loan? i did the same thing. borrowed 50k, added another 20k or so to the pile, paid cash for a rental property, paid the loan off out of pocket a couple weeks before i retired. a couple years pass & the house has doubled in value. wish i had used that tool a few more times while working!
mortgage at 2.875%? i would never pay a cent extra to principal reduction. that rate you are paying is as close to free money as you will ever find! great job!
Thanks everyone for the replies.
I know I am significantly LBYM and in a risky place financially. That is where all my uncertainty about FIRE is stemming from. At the same time, I feel almost powerless to change it barring any catastrophes.
I will say that wife and I will never quite be on the same page about LBYM and FIRE. So that answers my main concern about whether FIRE is a reasonable goal in my position.
I did have one question triggered by the response that house value to rental income is out of balance. I will look into that a little more. Not going to sell the property at this point in time, but some serious food for thought.
I will be doing the cash for clunkers thing and will need to figure out how to wisely invest that income. That will be my main financial goal for 2018.
LBYM - I will do more research to see how people ratchet down their expenses to meet FIRE goals on sub $100k gross income where property costs feel high (zillow search returns zero single family homes under $300k).
I get that I could sell the fixer upper and pay off the rental and move back into the rental, then dump all my mortgage savings into retirement funds - I will need to look more closely at that. Luckily, my wife could care less what her house is - I'm the one that wants a nice house and I can change me.
So I think I should sell the rental property. I've been evaluating my real estate market and modelling different scenarios rental vrs index fund and the 10 year returns are close to the same if my property value continue to climb at 4%+ with low vacancy rate. But right now (2018), I can get out of the rental without gains tax (i lived there in 2014 & 2015). after closing cost and mortgage payoff, and payback on depreciation schedule, I'd clear about $200k from the sale. my question is where to go with those extra funds.
I'd like to do the following: payoff the $48k 401k loan, payoff $32k HELOC, leaves about $120k. Then maxout 457 account for me and self employed wife can pretax invest equal to her annual business income (20k) for 2018. Then max our Roth IRA for both of us ($11k) would leave about $79k that I could either use against my current 30 year mortgage (28 year remain at 4.25%), invest outright into an index fund, or do something different - suggestions?
Once this is done, I can easily annually maximize my 457 account and maybe clear enough to continue some pretax contributions into wife's retirement fund while still not actually LBYM (lbym is the goal, but can't get there instantly).
Any thought or suggestions? smart plan, dumb plan?
You didnít mention kids - depending on your home you could rent out a room to someone for some side income. Easily a 15% raise on your income.
I agree you sound spread thin. Since your wife and you are on different pages maybe you can compromise. If you live frugally and save money whereas she spends it and agree for you to retire early and live off savings while she works - risk divorce will derail this plan.
Your home is like 6-7x your gross income? We have an enjoyable disagreement about our house being about 1.2x gross salary. It does seem very high for your income and while there may not be other options in your area - that doesnít mean you are entitled to a single family home...
no kids - just lots of pets. line 38 from our 1040 (gross income) is around $95k (2 salaries + rental income - student deductions - rental deductions).
wife and me are good on finances goal differences. I support hers, she supports mine. We both don't go crazy with frivolous spending. Her future employment will make my early retirement feasible (health care and $50k+ net income). Not sure if we will ever be financially independent.
Residence is mortgaged for $350k, so 3.7x annual income. Our rental is just under $90k mortgaged. FIRE aside, I would rather have a single family home and retire several years later, which is probably going to be the case.
For side income, the most lucrative is industrial hemp for medicinal purposes in Colorado. I have outdoor space for 5000 plants ($10/plant initial investment, $30-$55/plant resale value) 4 month grow season. It is legal at the state level, just need a $100 permit. It's uncertain at the federal level (unlike marijuana, which is clearly illegal at the federal level).
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